May 2008 Interesting Idea: Pay Off Your Mortgage Early Is It Right For You? If you have the means, a lot of financial planners will tell you to go ahead and pay off your mortgage early. And others don't believe in it, saying there are better things to do with your money. Before we look at this more closely, all financial planners will agree that paying down one's mortgage only makes sense after getting out of credit card debt, building up a satisfactory emergency fund and, if they have one, contributing enough to his or her 401(k) to garner any matching contributions from their employer. Once all that is taken care of, you might consider paying down your mortgage. No Debate Here… Some people should prioritize paying down their mortgage. They are people who are paying private mortgage insurance (PMI). PMI is insurance that homeowners pay but does nothing for their security. Lenders generally require it for buyers who have a down payment of less than 20% of the purchase price. It should be on your monthly mortgage statement and is usually $50 or more. If you're paying PMI, your goal should be to pay off 20% of the home's appraised value to get the PMI removed. Not only will the extra mortgage payments save you around 6% in interest, but they will save you hundreds of dollars in PMI. The argument "for" The most compelling reason is that you'll save a lot in interest. For instance, a 30-year loan of $200,000 at 6% interest, requires a payment of $1,200. But if you add just $100 to the payment each month, you will pay off the loan 5-1/2 years sooner and save a whopping $49,000 in interest over the life of the loan. Being free of a mortgage payment 5-1/2 years sooner is a very attractive idea. Also, it's an easy way to expand your net worth. First, it's a guaranteed 6% savings, which is a lot more than the banks will pay you in interest. You don't have to open another account, buy any mutual funds or shop around for savings rates. You don't even have to write a separate check or waste a stamp. All it takes is a flick of the pen to add a little to each mortgage payment. Plus, it feels good to "own" more and more of the homestead each month. And because of that, a lot of financial advisers take the attitude that if it works for you, do it. The argument "against" The naysayers quickly point out that when you pay down your mortgage balance, you're degrading one of your best tax protections — your mortgage interest deduction. So, if you're in a high tax bracket, paying down your mortgage might be less attractive. And their bigger argument is that you could be doing more with your money. If you put that $100 a month in a tax-deferred Roth IRA, in 25 years at 7%, you'd have nearly $76,000 in a tax-sheltered account. Of course, if that rate of return slips to 5%, the amount slips to $57,000, still more than the $49,000 you saved in interest. The best answer is probably to do both. You don't want to pay down the mortgage if it's postponing you starting a retirement account. Plus, you can always pay just $50 a month to gain a little peace of mind on the mortgage. There's something inherently attractive to a balanced attack. Sticking to a Budget Two Minute Quiz Invest Your Tax Return Career Corner Pay Off Mortgage? Saving Strategies Part Three Short on Cents Past Issues

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